Should You Own The 10 'Most Expensive' ETFs? (2024)

ETF investors are famous for . But are the most expensive ETFs worth what they charge?

X

Ten funds classified as ETFs by Morningstar Direct, including VanEck Vectors BDC Income (BIZD), Virtus Private Credit (VPC) and Grayscale Etherium Classic Trust (ETCG), tip the fee scale by reporting an adjusted expense ratio of more than 2.5%. That's well above the 0.54% median adjusted expense ratio of the 2,505 funds in the database.

High expense ratios run counter to the prevailing trend of lowering fees in ETFs and mutual funds. The asset-weighted average expense ratio of index ETFs, a good measure of what the typical investor pays, dropped to just 0.18% in 2019, according to the latest data available from the Investment Company Institute. And that's nearly half what it was in 2009, after falling every year since then.

Yet, some ETFs charge much more. And for some funds, it's due to offering a specific investment type that may be hard to find.

"These are indeed premium fees, but many of these are the only fund of its kind offering exposure so investors that really want it might be willing to pay up," says Todd Rosenbluth, head of ETF and Mutual Fund Research at CFRA.

'Layered Fees' Add Up

Costs on ETFs that buy pieces in other investments with "layered fees" can add up fast, says Dave Nadig, director of research at ETFTrends.com. Nearly all the ETFs with the highest fees are bundling together other investments, many carrying high fees of their own, he says.

One example is ETFs that invest in business development companies, or BDCs. BDCs are private investment companies that lend to typically lower-rated, private companies. The payoff? The yield on ETFs targeting BDCs is usually high. VanEck Vectors BDC Income yields roughly 9%, well above the 1.6% yield you'd get .

But you'll pay for that yield, too. VanEck Vectors BDC Income charges 10.2% annually, Morningstar says, many times higher than the typical 0.03% you'd pay to own an S&P 500 index ETF. VanEck is charging 0.4% for the ETF. But it's wrapping in the additional 9% or higher fees charged by the BDCs themselves.

"There are corners of the market where you're using a fund to essentially buy more funds," Nadig said. "And that layering gets expensive in a hurry."

Special Situations Outside The S&P 500 Will Cost You

Unique or hard to access markets also tend to carry high fees. Investments targeting cryptocurrencies are an example.

Grayscale Ethereum Classic Trust charges an expense ratio of 3%. But its structure is so unique, Nadig doesn't consider it to be be an ETF. It's the publicly quoted shares of Grayscale Ethereum Classic Trust. The fund does not offer the redemption mechanism as ETFs do.

But it's a lonely option as investors still await a full-fledged cryptocurrency ETF. "Grayscale provides access and exposure to the digital currency asset class in the form of a security without the challenges of buying, storing, and safekeeping digital currencies directly," said Grayscale Investments CEO Michael Sonnenshein.

But the scarcity factor is real. Breakwave Dry Bulk Shipping ETF (BDRY) charges a lofty 3.5% annual fee as it's one of the few ETFs targeting this very narrow niche. But with the ETF soaring more than 100% this year, investors who want in will pay up, Rosenbluth says.

What To Look Out For

If you're paying up for an ETF, make sure you're buying what you need. Rosenbluth notes when an ETF charges 1%, it's likely significantly straying from the benchmark. That's fine if that's your goal, but the ETF might be so "different than the broader universe that the risk is worth being mindful of," he said.

And do you really need the income you're paying up for, especially with "notoriously expensive" BDCs? Would a low-cost S&P 500 fund work instead? "Very few investors really need to focus on current income versus selling capital. Total return is usually what matters in the end," Nadig said.

The Most Expensive ETFs

Expense ratios among the priciest ETFs surpass 2.5%, well above those charged by S&P 500 funds.*

Sources: IBD, Morningstar Direct, * - Based on Morningstar Direct's ETF classification, ** -prospectus adjusted expense ratio as of Feb. 17, ***- not a traditional ETF structure